According to a news report published in this paper yesterday, the federal government’s Adviser on Commerce and Investment Abdul Razzak Dawood has blamed the increase in import of agricultural commodities such as cotton, wheat and sugar for rising import bill that is once again resulting widening of trade deficit.
Based on provisional reports, 8MFY21 goods import bill has inched forward by 6 percent to a total of $33.6 billion. Import bill for the three commodities has clocked in at $1.95 billion, growing 5 times over same period last year! At this rate, it appears the goods import bill for the full fiscal may soon be back in FY17 territory, dampening government’s efforts to curtail CAD in the medium term.
However, the comparison drawn for the agri-commodities import bill with the previous years is anomalous. It should be recalled that import of all three staple agricultural products has been heavily discouraged in the past through prohibitive tariffs. While import of wheat was fully banned until last year, sugar import was heavily taxed through ludicrous valuation at Customs, whereas import of cotton faced RD and ACD for first six months of every fiscal to protest domestic growers.
Except, years of arbitrary controls on domestic demand has brought things to a head. On one hand, delay in permission and removal of tariffs from import of wheat and sugar – even as the price of both commodities had begun to spiral out of control in domestic market as early as 1QFY20 – created pent up demand, resulting in bulk sized imports in 1QFY21. This has precipitated in oversized import bills in this fiscal, setting off alarm bells.
Similarly, the shortfall in domestic cotton output has been building over past several years, leading to lower ending stock with spinning industry every subsequent season. Clearly, the situation precipitated into a crisis by the time current marketing season began. Not only the domestic cotton output is at its 35 year lowest, but heavy import volume has also coincided with peak ginning period during Jun – Dec.
Although import of staple domestic crops such as wheat and cotton is creating fears of a knee-jerk reaction leading to a premature ban, the federal government must take pause and pay heed to Commerce czar’s advice.
First off, it must appreciate that the low base effect will disappear by next fiscal as full year import bill for three commodities may clock in at as high as $2.5 billion in FY21. Global demand forecasts have also begun to incorporate Pakistan’s import demand into its revised estimates; recall that global commodity market was initially taken by a shock when the GoP placed bulk sized orders in international market overnight through TCP after years of ban/inactivity. Pakistan’s import demanded also coincided with opening of global economy after worldwide lockdowns in mid-2020, thus playing some part in fuelling the ongoing rise in global commodity prices.
Moreover, while international commodity markets are still reeling from the shock caused by disruption in supply chain in the aftermath of lockdowns and resulting backlog of shipments, global production of major agri-commodities is still largely balanced. Thus, international commodity prices are expected to remain range-bound within historic bands (10-year average) in the medium term, and not spiral out of control.
Two, the policymakers must come to terms with the fact that years of stagnant farming productivity has resulted in stunted yields, exacerbated by freak weather events due to effects of climate change. Meanwhile, population growth has remained largely on track, resulting in ballooning demand, especially for food commodities.
Consider that forecast of balanced/surplus sugar production in the ongoing season appear to have fallen wide off the mark, despite insistence by FCA, provincial crop survey departments, and industry leaders that raw material sugarcane is in surplus supply. Similarly, while cotton import bill has seemingly had the most ‘devastating’ impact on total imports, its potential for re-export – amid rebounding activity in value-adding textiles – means that the effect should be largely mitigated.
If the GoP re-enacts tariffs on any of the agri-commodity imports, it will find that the trade-off may not be worth the risk. One, wheat and sugar price spirals still continue to rear their head in domestic market, indicating a persistent domestic supply-and-demand gap. Two, import of these commodities by private sector at higher market prices is bound to pique the interest of domestic producers, who are expected to increase investment in inputs and improve productivity to take advantage of the supply gap.
By liberalizing agri-commodity import bill, the PTI government has stumbled upon an opportunity to jolt the uncompetitive domestic farming sector out of its slumber. The increased competition from higher priced and higher quality imports shall soon result in improved activity in domestic agriculture, as opportunists take advantage of growing domestic demand amid falling supply. The ominous import bill shall produce dividends in the medium term. If it results in improving productivity of domestic agriculture, Pakistan will benefit, even if PTI is no longer around to. Think big.
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